In the global tech industry, the services business has become a strategic asset. Last week, Dell (NASDAQ: DELL) agreed to shell out a whopping $3.9 billion for Perot Systems (NYSE: PER).
Now, there's another biggie deal: Xerox (NASDAQ: XRX) has agreed to pay $6.4 billion for Affiliated Computers Services (NASDAQ: ACS). Just like Dell, Xerox's core hardware business is undergoing lots of pressure. So why not expand into something else?
Unfortunately, this strategy is far from easy. In fact, Xerox's stock is down 17% on the news.
But there are attractions to the deal. Xerox already has a decent services business, generating about $3.5 billion. By adding ACS, the business will get to about $10 billion, with a good chunk from the health care industry (which is likely to grow over the long term). What's more, about 80% of the combined revenues will be recurring.
Another advantage is the cost synergies. Xerox projects that it can reduce costs by $300 to $400 million over the next three years.
Oh, and the deal is certainly transformative move. Perhaps it will help charge things up?
But, then again, this is the risk. Can Xerox pull off the challenge? At the same time, the deal will entail significant dilution to existing shareholders. After all, 70% of the purchase price is in Xerox stock and there will be a need to issue a $300 million convertible note.
Tom Taulli is the author of various books, including The IPO Primer and The Complete M&A Handbook
Closing Bell: Economic Catapult for Thanksgiving & Black Friday (WMT, TGT, GRMN, GOOG, MSFT)
Deere up on Q4 earnings performance
Reid Hoffman: LinkedIn will go public (at some point)
Add your comments